Hire purchase: common pitfalls for businesses

Now the roots of economic recovery are starting to take hold, companies are beginning to consider how best to invest in their own growth. For companies involved with manufacturing or agriculture, options include investment in plant and machinery for further expansion or improved efficiency. However, consideration also needs to be given to the best way to finance such investments. One such method is hire purchase finance: but any business thinking about this should be aware that this can come with its own pitfalls.

What is hire purchase?

Hire purchase finance, although more common in consumer matters, can also be used by businesses. It is a method of asset finance that is a type of lease agreement with an option (but not an obligation) to buy the asset for a nominal sum at the end of the agreement. A key benefit is that, despite not owning the asset, possession is granted immediately. Typical hire purchase structure means:

The lessee pays the lessor an initial deposit, which represents a proportion of the purchase price;

The lessee makes interim payments (typically monthly) which, together with the deposit, equal the purchase price plus a return on capital to the lessor; and

Once all the instalments have been paid, the lessee usually has the option to buy the asset.

Machinery that your businesses may require for expansion is unlikely to be sold by finance companies directly. It is more usual for business sales to originate with either a distributor or retailer, who will then refer you to a finance provider to arrange hire purchase finance. If finance is approved, the dealer then sells the machinery to the finance company and the finance company hires the goods to the business for the duration of the hire purchase agreement.

Unfair Contract Terms Act

There will be terms implied into a hire contract, under the Supply of Goods (Implied Terms) Act 1973 but, typically, finance agreements have standard limitation of liability clauses. In business-to-business contracts, it is common for commercial entities to apportion risk between each other and the courts tend not to intervene. Contract clauses restricting liability for terms relating to the quality of the assets can be excluded if they satisfy the requirement of reasonableness under the Unfair Contract Terms Act 1977. Such clauses may provide that:

The supplier or dealer was chosen by the business entering into the hire purchase agreement and is expressly stated not to be an agent of the finance company;

Not having had any control over the goods being hired, the finance company will have no liability for the description, state, condition, suitability or performance of the goods;

If the law requires terms to be implied into the hire agreement, then you and the finance company both agree that the finance company is not liable for any breach, because otherwise the finance company would have charged higher rental charges or would not have entered into any agreement in the first place; and

The finance company will have no liability in contract for any loss of revenue, anticipated savings or profits or any loss of use or value, or for any indirect or consequential loss.

Such clauses are likely to be considered reasonable in business-to-business transactions, so if there were problems with the machinery after the hire contract was entered into, you might find yourself in the position where an expensive hire agreement had begun and you needed to continue to pay without the benefit of a working machine and no recourse against either the dealer (because there was no contract with them) or the finance company (because of valid limitation of liability clauses).

False representation

Although the contract for the supply and hire of machinery would be between you and the finance company, this does not necessarily mean that there would be no relationship between you and the dealer. For example, if a dealer induced you to enter into a hire purchase agreement through representations that subsequently transpired as untrue, you could be entitled to damages. In order to establish a claim against a dealer, you would need to establish that the machinery did not do what the dealer specifically stated it would.

Any representations by the dealer must be specific. The claim would fail if statements made by the dealer were expressions of opinion and not representations of fact, particularly if the dealer did not hold themselves out to have specialist knowledge, as any such statements could not be considered as having induced you to enter into the contract. If the representations were oral (not written), these would be far more difficult to prove and in any claim you would be inviting a court to decide whether it believes your version of events over that of the dealer.

Avoiding the pitfalls

If you consider hire purchase finance to be the best way to acquire the benefit of machinery for your business, then make sure you read carefully any exclusion and limitation of liability clauses. A court would be far more likely than not to consider such clauses reasonable in a business-to-business transaction.

When liaising with the dealer, be specific with your enquiries about the machinery’s performance and capability, and try to have any responses confirmed in writing. Advertising literature may be deemed to form representations by the dealer and so should also be considered.

Finally, be satisfied that what you are proposing to hire is suitable for your business needs and the costs associated with it represent value for money. It may be possible to achieve your business needs through alternative methods of financing – or it could even be more cost effective to purchase the machinery outright. If a deal seems too good to be true, it probably is.

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